StanChart Settles, ECB, Knight ‘Dormant’ Loss: Compliance

By Carla Main -
Aug 15, 2012

Standard Chartered Plc settled a New
York money-laundering probe for $340 million a day before the
bank was to appear at a hearing to defend its right to continue
operating in the state. It still faces federal probes over
allegations it helped Iran funnel money through the U.S.

The company rose as much as 5.1 percent in London after
the bank settled the New York money-laundering probe.

As part of the agreement, the bank agreed to install an on-
site monitor for at least two years who will report directly to
state officials. New York regulators will also place examiners
at the bank. As a result of the accord, announced yesterday by
the state in an e-mailed release, the hearing that had been
scheduled for today was adjourned.

The settlement amount is the largest ever paid to an
individual regulator as part of a money laundering accord. In
June, ING Bank NV agreed to pay $619 million to settle similar
allegations. That sum was split evenly between a $309.5 million
payment to the federal government and an equal sum to the New
York District Attorney’s office.

A person familiar with the New York state case said that
Lawsky had sought as much as $700 million to settle his
investigation. Yuki Finch, a spokeswoman for Standard Chartered
in London, declined to immediately comment on the deal.

The resolution still leaves the London-based bank the
subject of investigations by the U.S. Treasury, the Federal
Reserve Bank, the Justice Department and the Manhattan District
Attorney.

For more, click here.

Compliance Policy

EU Banking Plans Call for ECB to Share Power, Documents Show

The U.K. is pressing for the European Central Bank to share
power with national regulators as it takes over euro-area bank
supervision, according to policy planning documents obtained by
Bloomberg News.

The ECB should have a core set of central powers to oversee
all banks in the 17-nation currency bloc while delegating some
tasks to individual countries, under one option favored by the
U.K. and European Union economic policy officials. The ECB
supports a similar “light touch” approach that would leave
day-to-day supervision for most banks in the hands of national
authorities, according to the documents.

Another approach, backed by officials working on EU
financial rules, would require the ECB to take major oversight
decisions for all banks, the documents show. Officials opposed
to this approach say it could compromise the central bank’s
reputation and perceived independence, according to the
documents, which include EU-level and U.K.-based analysis of the
policy debate.

Euro-area leaders in June decided to create a common bank
supervisor and beef up the ECB’s oversight role, in order to
pave the way for direct bank bailouts from the currency area’s
firewall fund. The European Commission, the EU’s regulatory arm,
plans to offer a slate of proposals in September so bloc-wide
bank supervision can start in 2013.

For more, click here.

New Rules on Suspicious Activity Reporting, ASIC Says

The Australian Securities & Investments Commission has made
new market integrity rules for suspicious activity reporting and
short sale tagging requirements, the agency said in a statement.

The rules will apply for Australian Securities Exchange and
Chi-X markets, according to the statement.

The obligations will require participants of the ASX and
Chi-X markets to notify ASIC when they become aware, in the
course of their business activities and in the course of
complying with existing obligations, of certain suspicious
trading activity, the agency said in the statement.

The short sale tagging obligation will start March 1, 2014
and will require market participants to specify, at the time an
order is placed, the quantity of a sell order that is a short
sale, according to the statement.

Fed’s Dudley Supports Money Fund Rules to Protect U.S. Economy

William C. Dudley, president of the Federal Reserve Bank of
New York, said new rules are needed to protect the financial
system from a run on money-market mutual funds, lending his
support to a regulatory overhaul proposed by U.S. Securities and
Exchange Commission Chairman Mary Schapiro.

“A glaring vulnerability exists with money-market mutual
funds,” Dudley wrote today in a Bloomberg View column. “Money
funds should have capital buffers and modest limits on investor
withdrawals. Such reforms are necessary to protect the economy
from financial instability in the future.”

Capital cushions and redemption restrictions are part of
Schapiro’s plan to bolster money-fund regulation. She has so far
failed to win enough backing among her four fellow
commissioners, who may vote as early as this month on whether to
ask for public comment or kill the proposal.

Any of 105 U.S. money funds with combined assets of about
$1 trillion could have been forced below its $1 share price by a
single default among its 20 biggest borrowers, Dudley wrote in
the column, citing Treasury data.

The number of vulnerable funds increased to 219 if a
default occurred among any fund’s top 10 borrowers, according to
the annual report of the Treasury’s Office of Financial Research
published last month. The study assumed 40 percent recovery on
all unsecured lending and full recovery on a fund’s repurchase
agreements.

For more, click here.

Compliance Action

Knight $440 Million Trading Loss Said Linked to Dormant Software

Knight Capital Group Inc. (KCG)’s $440 million trading loss
stemmed from an old set of computer software that was
inadvertently reactivated when a new program was installed,
according to two people briefed on the matter.

Once triggered on Aug. 1, the dormant system started
multiplying stock trades by one thousand, according to the
people, who spoke anonymously because the firm hasn’t commented
publicly on what caused the error. Knight’s staff looked through
eight sets of software before determining what happened, the
people said.

Knight, based in Jersey City, New Jersey, hasn’t explained
in detail what caused the trading losses, which depleted its
capital and led to a $400 million rescue that ceded most of the
company to a group of investors led by Jefferies Group Inc. (JEF) The
45-minute delay in shutting down the malfunction has confused
some securities professionals, who say that trading programs can
typically be disabled instantly.

Chairman and Chief Executive Officer Thomas Joyce, 57, in
an Aug. 2 interview with Bloomberg Television’s “Market
Makers,” described the situation as “an infrastructure
problem.” He said it was “more of a networking problem as
opposed to using quantitative tools to trade.”

The company, whose market-making unit executes about 10
percent of U.S. share volume, will hire an outside adviser to
investigate what led to the losses. Kara Fitzsimmons, a
spokeswoman, said she couldn’t comment at this time.

Knight’s computers bombarded the market with unintended
orders just after trading began on Aug. 1, causing volume to
surge and prices to swing in dozens of securities. NYSE Euronext (NYX)
canceled trades that were 30 percent or more away from the price
at the start of trading, a decision that applied to six
securities out of 140 that were reviewed.

The company was updating software in preparation for an
NYSE plan aimed at luring more individual investors to the
exchange, Joyce said in the Aug. 2 interview, without offering
details. The Big Board’s so-called retail liquidity program,
designed to attract smaller investors by giving them superior
prices, was being implemented that day.

Rules formalizing the treatment of erroneous trades were
adopted amid criticism by investors after exchanges and the
Financial Industry Regulatory Authority voided transactions
totaling 5.6 million shares in the market crash of May 6, 2010.
Regulators added guidelines governing when sales or purchases of
stock could be canceled after market makers said confusion about
which trades would stand prevented them from acting.

Knight lost the market value after the computer malfunction
bombarded the market with unintended orders that exchanges
declined to cancel. The refusal to let Knight out this time
shows that brokers face increasing risks from technology errors
after regulators toughened rules following the so-called flash
crash two years ago.

The May 2010 flash crash inaugurated reforms aimed at
reducing the discretion exchanges have to cancel trades.

For more, click here, and click here.

For a video report, click here.

Wells Fargo Pays $6.5 Million to Resolve SEC Broker Claims

Wells Fargo & Co. (WFC) will pay more than $6.5 million to
resolve U.S. Securities and Exchange Commission claims that a
brokerage unit and former employee sold complex securities
without disclosing risks to investors.

The brokerage now known as Wells Fargo Securities
improperly sold asset-backed commercial paper structured with
mortgage-backed securities and collateralized debt obligations
to municipalities, non-profits and other customers during 2007,
the SEC said yesterday in a statement announcing the settled
administrative proceeding. The San Francisco-based bank didn’t
get sufficient information about the securities and relied
almost exclusively on credit ratings, the SEC said.

Wells Fargo, which resolved the SEC’s claims without
admitting or denying wrongdoing, will pay $65,000 in
disgorgement and $16,751.96 in interest in addition to a $6.5
million fine, the SEC said.

“These issues occurred more than five years ago and
pertain to a part of the firm that was completely revamped,”
Ancel Martinez, a Wells Fargo spokesman, said in an e-mail. “We
are pleased to put this matter behind us.”

Shawn Patrick McMurtry, a former Wells Fargo Securities
vice president who left the company in June, will pay a $25,000
penalty and received a six-month suspension, the SEC said.

A phone message left at a listing for McMurtry in St. Paul,
Minnesota, wasn’t immediately returned.

Belgian Banks May Be Forced to Go Beyond Basel III, L’Echo Says

The National Bank of Belgium may require the nation’s banks
to hold more capital than required under international rules
agreed on by the Basel Committee on Banking Supervision, L’Echo
reported, without saying how it obtained the information.

The central bank will seek information from lenders this
month on how they plan to meet the new international standards,
known as Basel III, according to the newspaper.

The Basel rules, to be phased in beginning in 2013, would
more than triple the amount of core capital lenders must hold
compared to previous international standards.

L’Echo didn’t say how large the extra requirements for
Belgian banks would be.

JPMorgan Bank to Hold Collateral After Futures Firms’ Losses

JPMorgan Chase & Co. (JPM) will allow customers to house excess
swaps and futures collateral in a separate bank account as it
seeks to reassure investors after losses at MF Global Holdings
Ltd. and Peregrine Financial Group Inc.

The new service will allow clients to automatically
aggregate excess margin at JPMorgan Chase Bank N.A., the firm’s
insured deposit-taking unit, Emily Portney, head of agency
clearing, collateral and execution at the New York-based bank,
said in a telephone interview.

JPMorgan’s decision shows how the brokerage model is under
attack, said Craig Pirrong, a finance professor at the
University of Houston. Under that model, futures brokerages earn
money on customer collateral by lending it out at higher rates
than they pay to the investor or by buying securities with it.

At MF Global and Peregrine, the excess customer money held
at the brokerages is what disappeared. Collateral backing trades
of MF Global customers that was held by CME Group Inc. (CME), as well
as Peregrine customer assets maintained by Jefferies Group Inc.,
were protected.

For more, click here.

Courts

EU’s Highest Court Fixes ESM Irish Case Hearing Date for Oct. 23

The European Union’s highest court set the date for oral
arguments in a case about the European Stability Mechanism for
Oct. 23, according to lawmaker Thomas Pringle, who is
challenging Ireland’s ratification of laws on the ESM, the euro
area’s future permanent bailout fund.

Ireland’s Supreme Court sought the EU Court of Justice’s
view on questions including whether the ESM is compatible with
EU treaties and if a decision by EU governments on March 25 to
amend a treaty to provide for the ESM is valid.

Parties’ written arguments are to be submitted by Sept. 14,
according to an e-mailed statement yesterday by Pringle’s
lawyer, Joe Noonan.

The establishment of the 500 billion-euro ($617 billion)
ESM is on hold pending a decision by Germany’s highest court.
The ruling by the Federal Constitutional Court is due Sept. 12.

Rehn Says Spain Has Open Mind on Sovereign Aid Request

European Union Economic and Monetary Affairs Commissioner
Olli Rehn talked about the prospects for a sovereign bailout of
Spain and outlook for the European economy.

Rehn, who spoke with Bloomberg Television’s Sara Eisen,
also discusses the future of Italy and Greece.

For the video, click here.

Hilltop’s Ford Says Glass-Steagall Shouldn’t Have Been Repealed

Gerald J. Ford, who became a billionaire buying distressed
lenders during the savings-and-loan crisis, said he believes the
Glass-Steagall Act shouldn’t have been repealed.

“We will deal with these large banks that have risk,”
Ford, chairman of Dallas-based Hilltop Holdings Inc., said today
in an interview on Bloomberg Television’s “Market Makers” with
Stephanie Ruhle and Scarlet Fu. “The doctrine or thinking
they’re too big to fail will always be with us.”

Former banking executives, government officials, analysts
and investors have been calling for the breakup of the biggest
banks as the firms’ shares languish at or below tangible book
value. Some are calling for the reinstitution of Depression-era
Glass-Steagall, which forced deposit-taking companies backed by
government insurance to be separate from investment banks.

Sanford “Sandy” Weill, who helped build Citigroup Inc.
into one of the world’s biggest lenders, said last month that
investment banking should be distinct from traditional banking.

Ford isn’t related to the former U.S. president or
carmakers.

Comings and Goings

Resolution CEO Tiner to Retire as Firm Abandons Sale Plans

Resolution Ltd. (RSL), the insurance buyout firm founded by Clive
Cowdery, abandoned plans to sell businesses on the public
markets and said John Tiner, head of its management company,
will retire.

The boards of publicly traded Resolution Ltd., management
firm Resolution Operations and Friends Life, the operating
insurance business, will be overhauled as Andy Briggs becomes
chief executive officer, the Guernsey, Channel Islands-based
company said today. The firm scrapped its return target, said it
won’t make any more acquisitions and reported lower earnings.

Cowdery created Resolution in 2008 to buy, merge and sell
U.K. life insurers. The European debt crisis and changes to how
insurers’ capital is regulated made it more difficult to squeeze
cash from the acquired companies’ funds and sell firms on the
public markets. Resolution had planned to sell shares in its
open and closed life insurance businesses separately by 2014.

Cowdery led Resolution Operations as it charged fees to
advise Resolution Ltd on deals. The changes will comply with new
U.K. rules on companies that are managed by external entities,
Cowdery said on the call.

Tiner, a former head of Britain’s Financial Services
Authority, will retire as CEO of Resolution Operations, where he
headed implementation of the firm’s strategy. Briggs, the former
CEO of Scottish Widows and current head of Friends Life, will
replace Tiner as chief of the combined firm, and the companies
will merge their boards with the board of Friends Life.